SYSTEMATIC INVESTMENT PLANS (SIP)

SYSTEMATIC INVESTMENT PLANS (SIP)

The significance of SIP (Systematic Investment Plan) in mutual funds can be properly comprehended at the time stock indices are going up and down often. SIP refers to investing money at spaced intervals in smaller quantities as against making a one-time lump sum investment.

The desired end is to capitalize on the volatility of equity markets by causing the average purchasecost to be lowered. Nobody will argue about the usefulness of a SIP but there is also a darker side to it. Let us weigh the pros and cons of it:

Advantages

l)The most important benefit of a SIP is the chance to reduce the average cost. This can be done when equity markets go through a stormy patch. As the investment amount of eachinstallment is fixed there is a gain for the investor who receives a higher number of units. Here is an example:

Let us suppose that the monthly investment installment is Rs. 1,000 and the net asset value (NAV) of the fund is Rs.50. This will cause 20 units of the fund to be credited to the investor. Next month if there is a volatile market the fund's NAV will fall to Rs.40. This in turn will cause a lowering in the average purchase cost; and in this way the investor will have 25 units credited to his account. What this means is that a SIP can assist investors in benefitting from volatility in equity markets.

2)A lack of discipline in investing invites trouble for us. Very often when we keep money aside for the purpose of investment we end up using it for other purposes. The investor is thus removed far from his goals. With an SIP the investor continues to be invested in a disciplined way and remains on course to accomplish his financial goals.

3)An excuse that is often heard for not investing is the lack of money. By lowering the minimum investment amount SIP solves this problem.

4)For instance the minimum investment amount for a lump sum investment in a diversified equity fund may be Rs.5,000 it can be as low as Rs.500 for a SIP. This route of investment is more within your pocket.

5)Very often investors try to time the market to get invested when markets have bottomed out. This task is not within the reach of most investors. A SIP investment nullifies market timing. As it is an ongoing investment investors can focus more on urgent matters.

Disadvantages

1)If equity markets rise in a secular way a SIP could fail in lowering the average purchase cost. This is possible in shorter periods of time. In this case investing through a SIP could become more expensive than a lump sum investment. The answer is to go for a SIP that runs through a suitable time frame of perhaps 12-24 months.

2)A SIP becomes aimless if it i not a part of an investment plan. It is not an end in itself but only a means to an end. It should be part of an investment plan with an aim.

3) Whatever the SIP may be a fund that is not well-managed will stay that way. You have to choose a fund that is properly managed which is right for the investor and then only should you invest in it through a SIP.

There are a number of plus points in the SIP method of investing and there may be times when it may not come up to our expectations

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